Cash to former participants; administrative fee reduction to current participants
Green Bay, WI The Eastern District of Wisconsin has approved a $5.1 million settlement in Soulek v. Costco Wholesale Corporation. The settlement brings to an end another ERISA lawsuit, which alleged that plan fiduciaries failed to manage employee retirement funds prudently, as required by ERISA.
Former participants and current participants who cease to have a plan account by the settlement’s effective date will receive a check drawn from a fund of $400,000. Payment amounts will be based on the number of quarters during which the participant’s account balance was more than $1,000 between May 30, 2014 and March 17, 2022. Current participants will receive a reduction in future administrative costs drawn from a fund totaling $3.2 million. Administrative costs will be reduced until the $3.2 million is fully spent. About 250,000 participants and former participants are affected.
Wasting workers’ retirement savings
Dustin Soulek brought a class action lawsuit against Costco Wholesale Corporation and the fiduciaries of the Costco 401K Retirement Plan in June 2020. The complaint alleges that the employer and fiduciaries:
allowed the plan to charge "unreasonably" high record-keeping and administrative fees;
failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost;
maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs, and/or better performance histories;
chose more costly “actively managed funds” rather than “index funds” that offered equal or better performance at substantially lower cost; and
charged plan participants fees that were consistently greater than the fees of most comparable 401K plans, when fees are calculated as cost per participant or when fees are calculated as a percent of total assets.
Especially with regard to the fee issue, it is important to know that the Costco 401K Plan is a large plan, with $20.5 billion in assets as of Dec. 31, 2019. Large plans are generally able to negotiate with service providers for lower per participant fees.
Supreme Court speed bump
The lawsuit was stayed in September 2020, pending the Supreme Court’s decision in Hughes v. Northwestern University, a similar ERISA lawsuit, that also alleged that fiduciaries wasted participants’ retirement money through high fees and poor investments. In January 2022 the Supreme Court vacated the Seventh Circuit’s dismissal of the participants’ lawsuit and remanded the case back to the District Court for a new context-specific valuation of the participants’ allegations. The parties in Soulek began serious settlement negotiations thereafter.
ERISA’s guarantees evaluated in context
ERISA Section 404 requires that plan fiduciaries act solely in the interest of participants and beneficiaries and pay the reasonable expenses of the plan. “Reasonable plan expenses” may include recordkeeping and participant communications, legally required plan updates and the cost of outsourced administrative expenses. Whether or not an expense is reasonable is largely evaluated in terms of process. The emphasis in fiduciary breach ERISA lawsuits tends to be on whether there is evidence that fiduciaries actually had a systemic process for reviewing investment results and expenses.
It is notable that the Complaint in Soulek focuses specifically on the fact that plan managers did not issue a new Request for Proposal (“RFP”) for administrative services for a substantial period of time. With no RFP, the fiduciaries had no opportunity to review competing bids for services. They appear to have simply let established arrangements roll on for years and years.
Similarly, nothing in the text of the law prohibits actively-managed investment options and the expenses associated with them. Nonetheless, a 2015 Washington Post analysis suggests that is rare for an actively-managed fund to outperform a passively-managed index fund, which follows the market as a whole.
Retirement savings are generally long-term investments. A series of recent ERISA fiduciary duty lawsuits seems to suggest that it always a breach of fiduciary duty to include pricier, riskier, actively-managed funds in the menu of options available to a 401K plan participant. Hughes seems to take a different position -- that a court’s analysis should be very fact- and context -driven.
A history of successful breach of fiduciary duty lawsuits
Since January 2020, the number of ERISA class action lawsuits targeting the alleged mismanagement of 401K plans has increased exponentially. Many of these have settled, rather than proceeding to a judgment and award. Among these have been:
Becker v. Wells Fargo & Co., which ended in June 2022 with a $32.5 million settlement;
Jones v. Coca-Cola Consolidated Inc, which ended in March 2022 with a settlement of $3.5 million; and
Brown-Davis v. Walgreen Co., which ended in February 2022 with a settlement of $13.5 million.
It is no surprise then, that Costco would choose to settle as well.
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